Will pricey new Twin Cities apartments pay off?

Flux is scheduled to open soon at 2838 Fremont Ave. S in Uptown, adjacent to the popular trail known as the Midtown Greenway. (Staff photos: Bill Klotz)

Developers race to open their buildings first

Nearly 10,000 apartments are in the pipeline in the Twin Cities — the bulk of them in Minneapolis — and many will be asking rents in the upper bracket of $2 or more per square foot.

Vacancy rates are hovering around 2 percent in the cities, the lowest in decades. So, the question is: Are these developers going to get their asking rents or end up making concessions? That depends on which buildings open first and how long it takes before they saturate the market, experts say.

“Those that are perceived to have a very high value and that get into market first will lease well,” said Tom Melchior, director of market research for LarsonAllen, a professional services firm in Minneapolis. “Over time, as new buildings come online and turnover occurs, the general market as a whole will see higher vacancy rates.

“There’s no question that there are thousands of these units in the pipeline right nowthat are all at this high end,” he added. “The market is going to have a difficult time absorbing them in a short period of time.”

Greco Real Estate Development is among those banking on hitting the ground first. The Minneapolis company has five projects in the works, including two under construction. Flux is a 216-unit building scheduled to open Jan. 1 at 2838 Fremont Ave. S in Uptown, adjacent to the popular bicycling and walking trail known as the Midtown Greenway. Rents will average $2.10 per square foot.

“We’re on schedule with our lease-up on that project,” said Arnie Gregory, principal with Greco. “We’re getting our renters. We have no concessions.”

Blue, a 242-unit building in the Lyn-Lake neighborhood, appeals to young adults who want a certain lifestyle that renting offers, including lounge areas with comfortable furniture.

Renters at Flux and at Blue, a 242-unit building that Greco opened in 2008 in the Lyn-Lake neighborhood, are 25 to 40 years old with incomes of about $70,000 a year, Gregory said. Blue opened with rents in the $1.90s per square foot, and tenants are renewing at $2.03 and $2.04 per square foot.

“It’s ground zero,” he said of Uptown, which offers bars, restaurants and recreation within walking distance. “They are moving to Minneapolis, and they want what Minneapolis has to offer.”

What they apparently don’t want is the uncertainty of buying a home that can lose value or trap them if their job disappears, said Brent Wittenberg, vice president of Marquette Advisors. “This is a key,” he said. “Renting provides flexibility (and) mobility — ‘30 days’ notice and I’m out if I need to be due to job or life circumstance. If I own, maybe I can’t sell.’ ”

Developers also know that young adults want a certain lifestyle that renting offers: no maintenance headaches; amenities such as high-end lobbies, quality fitness rooms, a community room or lounge with comfortable furniture and Wi-Fi, a swimming pool and rooftop deck; and proximity to work, nightlife, recreation and to their peers, he added.

Those amenities are partly what are driving the “luxury” price of $2,000-plus per month for a two-bedroom, two-bath unit. By comparison, market rent in the Twin Cities area is about $1.50 per square foot, or $1,200 to $1,400 for a two-bedroom, two-bath unit, Melchior said.

“The problem is, it’s very difficult to develop a building and deliver a two-bedroom/ two-bath for $1,200 a month,” Melchior said. “To develop new, you almost have to go high-end in order to make the numbers work.”

The Doran Cos., based in Bloomington, also has a handful of projects on the planning boards, including one called Mill & Main, which will be built in two phases at 413, 419 and 425 Main St. S.E. in Minneapolis’ St. Anthony Main neighborhood, just across the Mississippi River from downtown.

Company principal Kelly Doran thinks that proximity to the Stone Arch Bridge, the river, a park and downtown will make a winning combination for the project, whose first phase is slated to open in mid-2013.

Doran said the project is in good shape for financing and would include a combination of townhomes and apartments, all for rent in that $2-plus range.

“So far, most of the new buildings are doing very well,” he said. “There are people who are willing to pay that for a quality apartment.”

Doran considers St. Anthony Main a great area to live in. “A lot of people want to be close to downtown, but they don’t necessarily want to live in the core of downtown,” he said.

Another apartment project in the works is Mill & Main, which will be built in two phases at 413, 419 and 425 Main St. S.E. in Minneapolis’ St. Anthony Main neighborhood.

Developers and others cite high costs of urban land and construction, including building materials such as wood and concrete as the reasons for the high rents they are proposing.

City officials in Minneapolis and St. Paul also expect stylish architecture and finishes, said Skip Sorensen, an architect with Pope & Associates in St. Paul. Because of the scarcity of land in the cities, most new buildings will offer underground parking, which can cost $8,000 to $10,000 per stall to build, he noted.

“The urban professional probably will use transit for (work), but they’re still going to own a car,” Sorensen said.

So developers of these buildings need to charge higher rents just to make their projects feasible, said Herb Tousley, director of the Shenehon Center for Real Estate in the Opus College of Business at the University of St. Thomas.

They aren’t being greedy, added Collin Kaas of Kaas Wilson Architects in Minneapolis.

“Every contractor I know is as lean as they can be right now,” Kaas said. “They are going to work at their cost plus a kind of a standard overhead and profit. There are no deals out there. Everyone’s working for an honest wage and honest pay and honest amount of overhead and profit.”

They’re being ‘greedy’ because new construction, + parking stalls, + amenities is expensive, so they are budgeting that plus minimum overhead. That’s a lot different from the “average” rental, because the average rental is something that’s been around for a long time/a rehab.

Plus, if they’re target market is people making $70,000+ a year, they’re hardly being greedy at $2,000 a month….those people can certainly afford it.

And why Uptown? Well, Uptown’s not the only place, but the reasons are in the article, too. Read a little closer next time, please.

I’m from Chicago and own 4 condo’s there…. even downtown in the city, our expectation of people with incomes at $70,000 a year plus are not expected to pay $2,000 a month in rent…. That is unacceptable, especially in today’s economic times.

Through market pressure and people’s unwillingness to cater to corporate greed, you will be forced to reduce prices to an acceptable rate, or you will lose, just like in the developers in the housing market.

$70 a year is not that much, especially when adjusted for taxes, etc… 2+ grand a month on an apartment? Your dreaming brother-